A Model of Financialization of Commodities
- 1 January 2013
- preprint
- Published by Elsevier BV in SSRN Electronic Journal
Abstract
A sharp increase in the popularity of commodity investing in the past decade has triggered an unprecedented inflow of institutional funds into commodity futures markets, referred to as the financialization of commodities. In this paper, we explore the effects of financialization in a model that features institutional investors alongside traditional futures markets participants. The institutional investors care about their performance relative to a commodity index. We find that in the presence of institutional investors prices and volatilities of all commodity futures go up, but more so for the index futures than for nonindex ones. The correlations amongst commodity futures as well as in equity-commodity correlations also increase, with higher increases for index commodities. Within a framework additionally incorporating storage, we show how financial markets transmit shocks not only to futures prices but also to commodity spot prices and inventories. Commodity spot prices and inventories go up with financialization. In the presence of institutional investors shocks to any index commodity spill over to all storable commodity prices.Keywords
This publication has 36 references indexed in Scilit:
- Speculators, commodities and cross-market linkagesJournal of International Money and Finance, 2014
- Limits to arbitrage and hedging: Evidence from commodity marketsJournal of Financial Economics, 2013
- Asset Prices and Institutional InvestorsAmerican Economic Review, 2013
- The Financialization of Storable CommoditiesSSRN Electronic Journal, 2013
- Style‐Related Comovement: Fundamentals or Labels?The Journal of Finance, 2011
- Fundamentals, Trader Activity and Derivative PricingSSRN Electronic Journal, 2008
- Agency and Asset PricingSSRN Electronic Journal, 2008
- ComovementJournal of Financial Economics, 2005
- Style investingJournal of Financial Economics, 2003
- Consumption, Income, and Interest Rates: Reinterpreting the Time Series EvidenceNBER Macroeconomics Annual, 1989